Should I use cash flow to improve property

Question

I am recently in contract for my first property, a college rental that was built in the 1950s. The property has great cash flow, but is drastically outdated and need repairs inside and out. My questions is should I keep my cash flow (profit) to maintain the the COC return 11% or use it to make the necessary repairs to the property. Personally, I do not require the cash flow for living, just looking how to put it to its best use. BTW, comparable houses that are updated inside and out look like they are selling for at least $45,000 + compared to my property. I appreciate any advice.

John Shackles · Answer

I mean, I think it would be a smart play to update incrementally. Improve on the items that will bring the most value first. It's good to compare what appliances comparable properties have in the area since the kitchen is typically a huge focal point to potential renters. I hope this helps!

Kevin Sage · Answer

Thanks for the great responses and advice.  Both of your suggests definitely help with keeping the need and timing of upgrades in perspective.

Brian Nordman · Answer

@Troy SmithThis is where you have to look at the payoff period calculation of the upgrades. For example, if you put $10k of upgrades into the property and by doing so you are able to increase rents to a level that will increase your annual cash return by $1k. It will take you 10 years to payoff those upgrades. If you plan on holding onto the property for only 3 years then you have to consider if it's worth it. But if you plan to hold onto if for 30 I would say heck yes make the improvements. Now, you also brought the concept of ARV into play. If you think by spending the $10k for improvements I used in my example and you hold onto the property for 5 years you have now paid off $5k of the improvements. But you said you could sell the property for $45k more than it's worth now so you would then come out $40k ahead in the deal. The ($10k) + $5k + $45k=$40k.

Mark Jones · Answer

If anything is truly broken, fix it. If it just needs updated, then I'd weigh how much more rent you can charge vs the cost of the update (particularly for college rentals). Upgrading just to match the amenities of nearby properties for sale doesn't make sense unless you're selling.

Updates may make sense if you're having trouble keeping the place rented.